Individual Retirement Accounts (IRA): A Complete Guide to Tax-Advantaged Retirement Savings
An individual retirement account (IRA) is a tax-advantaged investment account designed for retirement savings. These accounts allow your investments to grow either tax-free or tax-deferred, depending on the type of IRA you choose.
Types of IRAs:
- Traditional IRA
- Contributions may be tax-deductible
- Withdrawals are taxed as ordinary income in retirement
- Required minimum distributions start at a certain age
- 2024 contribution limit: $7,000 ($8,000 if age 50+)
- Roth IRA
- Contributions are made with after-tax dollars
- Tax-free withdrawals in retirement
- No required minimum distributions
- Income limits apply for contributions
- Contributions can be withdrawn penalty-free at any time
- SEP IRA
- Designed for self-employed individuals and small business owners
- 2024 contribution limit: 25% of compensation or $69,000
- No catch-up contributions
- Requires proportional contributions for eligible employees
- SIMPLE IRA
- For small businesses with fewer than 100 employees
- 2024 contribution limit: $16,000
- Catch-up contribution: $3,500 for those 50+
- Employer must make matching or non-elective contributions
- Rollover IRA
- Allows transfer of 401(k) assets to an IRA
- Helps consolidate retirement accounts
- Maintains tax-advantaged status of the funds
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Key Benefits:
- Tax-advantaged growth
- Wide range of investment options
- Additional retirement savings vehicle
- Flexibility in investment choices
- Potential tax deductions (traditional IRA)
Opening an IRA:
- Choose between a broker or robo-advisor
- No minimum requirement with many providers
- Can set up automatic contributions
- Investment options include stocks, bonds, ETFs, and mutual funds
Important Considerations:
- Early withdrawal penalties may apply before age 59½
- Annual contribution limits apply
- Income limits affect Roth IRA eligibility
- Tax deduction eligibility varies based on income and retirement plan access
- Can have both a 401(k) and IRA simultaneously
- Investment values can fluctuate based on market performance